Can theatre survive a financial recession? It's a question confronting everyone right now. But a weekend visit to this year's Ulster Bank Dublin theatre festival offers a surprising answer. Theatre can not only survive harsh economic times, it can prosper. But how on earth does one explain this paradox?

Talking to Loughlin Deegan, now in his fifth year as the festival's director, I discovered that in 2010 there are a record 31 productions and that box office figures have exceeded their targets. Deegan puts it down, in part, to what he terms "a revolution in Irish theatre" that has seen the great literary tradition challenged by an enterprising new generation of theatre-makers emerging from the universities, who have helped redefine the nature of the theatrical experience.

I wondered if this might be overstatement on Deegan's part. So I checked things out with Fiach Mac Conghail. He has also had five years in his job, running the Abbey theatre, which he has turned from a financial basket-case into a solvent institution. He sings from the same hymnsheet: business is good and people, even in tough times, seem hungry for theatre. Mac Conghail suggests it's because it is capable of addressing the big issues. He cites a show staged in the Abbey's Peacock theatre this summer in which an economist, David McWilliams, gave a lecture-demonstration, Outsiders, on Ireland's financial crisis. It packed the Peacock and is going on a nationwide tour this winter. The great myth is that audiences want froth and fantasy during a recession: the Irish experience suggests that what they really crave is innovation and substance.

But how well is this borne out by the festival? Of the five shows I saw, all were packed out, and three were quite simply outstanding. Certainly Phaedra, presented by Rough Magic at the Project Arts Centre, was both formally experimental and emotionally rich. Its starting point was Racine's play and Rameau's opera about a woman fatally drawn to her stepson; but Hilary Fannin's text transposed the action to the modern world and Ellen Cranitch's music combined French baroque with traditional folk airs.

What emerged, in Lynne Parker's brilliant production, was an utterly compelling piece about today's Ireland. This, it became clear, was a society in which traditional moral sanctions had broken down and in which the ostentatious wealth of the "Celtic tiger" years proved no more than a hollow sham. Theseus, in Stephen Brennan's performance, became a bullying tycoon who treated his family as little more than an appendage. Meanwhile the seductive Catherine Walker, as Phaedra, seemed in the grip of some unstoppable natural force, unchecked either by religion or rationality. Blending drama and music, with three onstage singers fulfilling a choric role, the piece showed that classical myth can be adapted to the modern world. We may have had our fill of Phaedres, but I would urge some enterprising British producer to import this production forthwith.

For all that the Dublin festival director says about the emergence of new theatre-makers, I'd also claim that Irish theatre still depends heavily on a love of the word. Proof of that came at the Gate theatre which has mounted a season of Beckett, Pinter and Mamet aptly subtitled The Relish of Language. And I got an almost delirious joy from hearing, and seeing, an hour-long distillation of Beckett's novel, Watt, adapted and performed by Barry McGovern and directed by Tom Creed.

As the hapless hero who goes to work in a remote country house owned by Mr Knott, McGovern reminded us that Beckett was, among many other things, one of the great Irish humorists. We are told of the long-suffering Watt that "he would literally turn the other cheek, if he had the energy". Wild images also proliferate, such as in Watt's modest sexual encounter in the kitchen with a Mrs Gorman, whose left breast had been removed "in the heat of a surgical operation". Beckett's autobiographical novel may be seen as a study of obsessional neurosis; it also emerges, in this adaptation, as explosively funny. And, in the same season, Wayne Jordan's revival of Harold Pinter's final play, Celebration, reminds us that Pinter could similarly turn an assault on the depleted memories of a group of nouveau-riche diners into a comic, and linguistic, feast.

I was less enthralled by a new play at the Abbey's Peacock theatre, B for Baby by Carmel Winters. Although strongly performed by Louis Lovett and Michele Moran, this turned out to be a shamelessly manipulative piece about two occupants of a residential care home and their dreams and desires. As for Krystian Lupa's Factory 2, part of a strong Polish element in this year's festival, I am not really equipped to pass judgment. The piece, described as "an ensemble fantasy inspired by Andy Warhol", ran for seven-and-a-half hours. I had to leave to catch a plane after the first third. But I felt no great sense of deprivation; and, although Lupa's Krakow cast faithfully conveyed the vanity and voyeurism that was part of the Warhol creative factory, I wondered why a famous Polish troupe was so fascinated by such an over-hyped product of American capitalism.

I had a good time in Dublin. But if I learned anything it was that theatre is at its best when, as with Phaedra, Beckett and Pinter, it offers real passion and verbal power. In short, what people crave, in time of recession, is theatre with a life-enhancing capacity.

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